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Are We Nearing a Bear Market? ETFs to Lean on

Sanghamitra Saha
Mutual Fund Report for TRMCX

Even after a hawkish Fed in its September meeting, Wall Street didn’t pause materially.  Naturally, overvaluation worries have been glued to the latest equity market rally. “But that doesn't mean it's time to sell everything, according to the Nobel-winning author Robert Shiller,” as per an article published on Business Insider.

In the top months before a bear market approaches, the CAPE ratio – which is the average inflation-adjusted earnings from the previous 10 years – was above its average of 22.1. But on Sep 22, 2017, the ratio was slightly higher than 30. The metric is at about 80% premium to the mean Shiller PE Ratio of 16.77 times. This high number, in the absence of materialization of most of the pro-growth promises made by Trump, calls for a correction in the near term.

In fact, the inventor of the ratio – Nobel laureate Robert Shiller – issued warnings for investors a few days back. He believes that price increase go hand in hand with earnings increase. But the latest market behavior seems to be “an overreaction to good earnings” to Shiller. The ongoing complacency in the market is probably the lull before the storm (read: Trump Rally to Wane? Buy These Quality ETFs).

Market Complacency Worrying Robert Shiller

Shiller previously predicted the dot-com bubble and the housing bubble. But still he indicated that "such episodes are difficult to anticipate, and the next one may still be a long way off." Also, “double-digit earnings growth and an economy nudging a 3% growth pace are attractive.”

We thus highlight a few quality ETFs that could interest investors who are nervous about North Korea’s nuke tests and German chancellor Merkel’s weak election victory, but still have faith on the stock market strength (read: 5 Quality ETFs and Stocks for Outperformance).

Barron's 400 ETF BFOR

This ETF seeks to track the performance of the rules-based and fundamentals-driven Barron’s 400 Index. The benchmark looks to select high performing U.S. stocks based on four fundamental factors--growth, valuation, profitability and cash flow. No stock accounts for more than 0.25% of the fund. The fund charges 65 bps in fees. Consumer discretionary, Information technology, financials, healthcare and industrial are the top five sectors with double-digit exposure each. (read: Best ETF Strategies for a Hawkish Fed).

iShares Edge MSCI USA Quality Factor QUAL

The fund looks to follow large- and mid-cap U.S. stocks displaying positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage). Information Technology, Financials, Health Care and Consumer Discretionary have a double-digit weight in the fund.

FlexShares Quality Dividend Index ETF QDF

The fund looks to provide exposure to the growth potential of U.S. securities while offering dividends. The fund yields about 2.85% annually (as of Sep 22, 2017). Information technology, financials, industrials and health care are the top sectors of the fund. No stock accounts for more than 3.56% of the basket. 

WisdomTree US Quality Dividend Growth Fund DGRW

The fund gives exposure to both growth and quality factors. The fund yields about 2.69% annually (as of Sep 22, 2017) and charges about 28 bps in fees. From a sector look, the fund has high exposures to Information Technology, Health Care and Industrials with about 20.89%, 20.69% and 20.16% allocation, respectively (read: 3 Excellent Dividend ETFs for Turbulent Times).

VanEck Vectors Morningstar Intl Moat ETF MOTI

The fund gives exposure to global quality stocks that Morningstar believes have sustainable competitive advantages. China (18.7%), Australia (13.6%) and Singapore (11.2%) get considerable focus in the fund. The 76-stock fund charges 56 bps in fees (read: Prepare for Uncertainty with These "Quality" ETFs).

Barclays ETN+ Shiller CAPE ETN CAPE

The product is a senior, unsecured debt security, linked to the performance of the Shiller Barclays CAPE US Core Sector Index. The index looks to provide a notional long exposure to the top four relatively undervalued U.S. equity sectors that display relatively strong price momentum.

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